Capital Link Region II Annual Conference 2010 Creating a Place for Healthcare Reform: Understanding the Financial Opportunities in Healthcare Reform and Utilizing the Financial Tools to Complete Your Building Project. Dang! Whats this Reform stuff and how do I get some of this phony baloney capital improvement money?!

Capital Link What We Will Learn Today? What is driving healthcare reform. What lies ahead. What the government is trying to do about it. And…what opportunities all this creates for you to make capital improvements! 2

Capital Link What is Driving Healthcare Reform? 3

Capital Link Making you Nervous Magellan circumcised the earth. With a 100 foot clipper. His men were very nervous. 4

Capital Link What We Will Look At The Driving Forces Assailing Us The Likely Impacts How CHCs Must Prepare 5

Capital Link Collision Course With Two Certainties That will overwhelm our industry.

Capital Link Demographics of an Aging Population Fragile Government Programs 7

Capital Link HealthChange, LLC Its far too late to avoid the collision.

Capital Link What Storm Will Hit CHCs? When 2/3 of voters are at or near retirement age?

Capital Link Well, Some of You…Like Me… Are Part of the Problem! Well, Some of You…Like Me… Are Part of the Problem! So, lets find out who. 10

Capital Link A Boomer Pop Quiz Dont worry… Its multiple choice.

Capital Link 1. Describe your first TV A. It was a huge wooden cabinet with two big knobs and a teensy screen featuring a black- and-white picture the size of a cantaloupe that I barely saw because my dad was always standing in front of it adjusting the picture and saying bad words. B. It was a Sony. 12

Capital Link 2. Who was on your first lunchbox? A. Davy Crockett B. Vanilla Ice 13

Capital Link 3. Do you remember Howdy Doody? A. Of CourseB. Youre making that name up! 14

Capital Link 4. Who was the first living President you remember? A. Dwight Eisenhower B. Vanilla Ice 15

Capital Link 5. Did you own a whole batch of 45 R.P.M. records that you wrote your name on the labels of and kept in a carrying case with a handle and put little plastic inserts in the holes to play them? A. Yes B. Why did you have to put little plastic inserts in the holes? 16

Capital Link 6. Where were you when you first heard The Beatles? A. In a station wagon on the way to school. B. In a fallopian tube. 17

Capital Link 7. Have you ever experimented with drugs? A. Uhhhh…no B. Uhhhh…no Dave Barry Turns 50 18

Capital Link So, Whats the Big Deal About Baby Boomers Getting Older and Why Should You Care? Aging baby boomers are going to change healthcare drastically…and, if you are going to survive, you need to understand why and how… because that is what is driving healthcare reform. 19

Capital Link What Should We Know About the Baby Boomers? There are more of them. They will live much longer. But the overwhelming influence is that they have profoundly different life experiences and values. Why? Because society was completely transformed in 20

Capital Link What Transformed Society So Quickly…& Why Is It Important? 1.Great depression No money No buying 2.WWII Earnings went unspent unprecedented industrial build-up…and… Women in the workplace 21

Capital Link After WWII Huge production capability Pent-up consumer spending And… LOTS OF BABIES (targetable market) And… Television 22

Capital Link Major Socio-Economic Shift Prior to WWII – Production for needs Post WWII – Production of needs 23

Capital Link What About Shoes? 70% of all shoes sold are athletic shoes Less than 1/10 of 1% of people who wear them are athletes 24

Capital Link The MOONRIDERS  Many of the current generation of elderly began life riding a horse  1930s - CHARACTER OF MODERN AMERICA  1940s - WWII the conscience of modern America  1950s - FAMILY PARADIGM  1960s - CIVIL RIGHTS REFORM and…  Placed 12 men on the moon 25

Capital Link The Baby Boomers  In 1958 I was 10 – Hoola Hoops, Fizzies  In 1964 I turned 16.  MUSTANG CONVERTIBLES.  Then I went off to college  THE PILL.  A few years ago I turned 50..  VIAGRA. 26

Capital Link Boomers… More of us…live much longer… Everything we ever wanted was there before we knew we wanted it! Wants have become needs Needs have become expectations Expectations have become demands In other words… weve got an attitude! 27

Capital Link So, What Is Driving the Need for Healthcare Reform? So, What Is Driving the Need for Healthcare Reform? 28

Capital Link The Demographic Pyramid The pyramid. The Chinese lantern The inverted pyramid 29

Capital Link 1. The Huge Number of Boomers

Capital Link U.S. Census data 1998 Americans aged 80 and over vs. preschool population Millions 31

Capital Link Millions When the elderly outnumber college-age youth by four to one, Americas youth tradition may only by a memory Source: Census (1996) 32

Capital Link 2. Increased Life Expectancy

Capital Link 1900 – 47 years. 1930s – under 60 years. (Social Security) 2010 – +/- 80 years – 100 years – 160? (100 years of retirement?). In fact, life expectancy is now increasing faster than people age. (Healthy women?) Implications for workers and their patients? Longevity and the Science of Aging 34

Capital Link Number of Workers Per Retiree OECD - Organization of Economic Cooperation and Development 35

Capital Link Declaring War on the Future: What About Our Government Programs? 36

Capital Link Crisis? Congress own Commission on Entitlement Reform reported that SS, Medicare and interest on the national debt will exceed all federal income by 2030! 37

Capital Link Healthcare as % of GDP 38

Capital Link Social Security, Medicare, and Medicaid Outlays as a Percentage of GDP Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, Based on data from the Congressional Budget Office, A 125-Year Picture of the Federal Governments Share of the Economy, , July 3, 2002, table 2. 39

Capital Link Federal Receipts vs. Entitlement Spending Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003 Based on data from Budget of the U.S. Government, FY 2004 and CBOs Analysis of the Presidents Budget, FY (As percent of GDP) 40

Capital Link 3. Financial Crisis?

Capital Link What About Our Affluence? Median net worth of a family headed by a 50-year old baby boomer? (not counting house) Half the families in the U.S. – net worth less than $1000 Stock Market? 42

Capital Link The Three Financial Ages Borrowers: Investors: Divestors:

Capital Link Percent of Adult Population 40 to 60 Years Old (Investors) 44

Capital Link Dow Jones Industrial Average 45

Capital Link Percent of Adult Population 40 to 60 years old (Investors) 46

Capital Link Dow Jones? 47

Capital Link So What Does this Mean For You? Its not just what you should do but why you should do it!

Capital Link In truth, there has never been a better time to initiate a capital project. Nor will there likely be a better time in your lifetime.

Capital Link #1. Interest Rates

Capital Link Interest Rates Rates Today Fed Funds – 0% TE Bond -.25% Prime – 3.25% Inflation - -2% One Year Ago Fed Funds – 3.00% TE Bond -4.5% Prime – 5.0% Inflation – 4% Ill bet you wont see lower interest rates in your life time

Capital Link #2. Fiscal Policy

Capital Link Fiscal Policy ARRA Healthcare Reform Capital Funds NMTC – extra $3 billion USDA – extra $1 billion

Capital Link #3. Building Costs

Capital Link Building Costs Inflation rate - -2% Construction bids – 10% to 30% under budget Building sales prices down 10% to 20% Lease and build-out?

Capital Link Window of Opportunity Lowest Interest rates Federal and state stimulus funding NMTC Stagnated building costs Postponed budget cuts (Medicare and Medicaid)

Capital Link This opportunity will not come again. If you will require capital improvements anytime in the next years at least…you had better Do It Now

Capital Link Health Reform and Health Centers So how does health reform fit in to this window of opportunity?

Capital Link Funding Levels New Funding for Health Centers: –$11 Billion over 5 years over and above the $2.2 billion in annual CHC funding –$9.5 billion for CHC operations under Sect. 330 –$1.5 billion for Capital over 5 years

Capital Link Health Reform – Funding Growth Chart * Does not include $1.5B for capital projects

Capital Link Health Reform: What Might It Mean? Access to plenty of funding to grow and expand –Unclear how new funding will be distributed –Managing growth will continue to be a challenge –Need for organized state-wide planning will be paramount Recruiting staff – especially clinical staff – will be a challenge –NHSC will need to be marketed MUCH more aggressively –ALL health centers need to increase involvement in training of ALL levels of needed clinical professionals Facility space and equipment will also be a major challenge –Physical capacity building critical –Adequate and attractive space needed

Capital Link Health Reform: What Will It Mean? Uninsured 39% Medicaid 34% Private 16% CHIP 2% Medicare 8% Other Public 1% Uninsured 26% Medicaid 42% Private 12% CHIP 4% Medicare 8% Other Public 1% Exchange 7% Current (2009) Patients by Payer Source Post-Reform (2015)Patients By Payer Source NOTE: Medicare patients will grow significantly over the next 10 years

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So What Didnt Happen? Cost containment still a challenge (ENTITLEMENTS!) Existing Annual Appropriations Not Guaranteed Although bill is paid for, cuts happen later Capital Tools not included –LGP running out –$10.5B to reach 30 million patients (only $3B available)

Capital Link What We Dont Know About Capital Funds How allocated over the 5 years –Front loaded? Award criteria and process –FIP? –Down Payment? –New application process Geography Rural v. Urban Timing –Wait for it?

Capital Link You Need a Plan

Capital Link Whew! So Whats Next?

Capital Link Our world just got faster … Health centers (and PCAs) will be pressured like never before to respond to opportunities for growth Most of the funding will be for operations, not capital The stakes will be high

Capital Link Funding for capital projects will continue to be challenging There will be some grant funding, but not enough There will be bitterness and frustration among the have-nots as a result On the debt side, the difficult lending environment is here to stay for the foreseeable future; interest rates will head higher NMTC will continue to be in short-supply and leverage loans will remain challenging And meanwhile the pressure to open new sites, expand, etc. will be very high

Capital Link The Dilemma for Health Centers: Paralysis or Action? Paralyzing Forces Health centers will feel caught between the ongoing fiscal challenges at the state level and the imperatives for growth at the federal level There will be confusing noise in the market Grant cycle mentality

Capital Link The Dilemma for Health Centers: Paralysis or Action? Action-Oriented Forces –Mission Imperative: More resources than ever before directed toward health centers will enable huge strides toward meeting community needs. –Risks of inaction are high: If I dont move ahead now, I will be left behind

Capital Link Opportunism vs Making Your Own Opportunities Opportunism = Passive The Feds are going to give away $1.5 Billion for capital projects; lets see what happens Making Your Own Opportunities = Active What communities do we want to be serving in five years and what do we need to be doing between now and then to get there? How do we align our strategic goals with funding opportunities that may (or may not) emerge? How will we meet our goals in either case?

Capital Link Who will succeed? Successful centers will be the ones who are willing to take risk in an uncertain environment and who have a well-founded plan to manage the downside risk (ACTIVE) The need for rapid growth will likely advantage health centers that have already achieved a certain level of scale. Active smaller centers that are less sophisticated will also be trying to get in the game Passive centers will not succeed

Capital Link What are the implications for an active vs. passive approach? The size, scale, frequency and complexity of health center capital projects will likely continue to grow The growing sophistication of the capital process will be necessary to succeed. The pressure for speed and a high level of technical knowledge will continue to grow.

Capital Link Financing is Key: How do you get it? You need to assemble your financial Legos

Capital Link Financing Components HC Reform Grants/Gifts NMTC State Funds TE Bonds Bank Loan HRSA LGP USDA 76 Tax Bonds

Capital Link Conventional Bank Financing RFP for local or regional banks Loan application CRA LTV Financial forecast As Completed appraisal Underwriting 77 Bank Loan

Capital Link Conventional Bank Loan Loan 80% of project value - $8,000,000 Interest rate 6.5% with 25 year amortization Where will the remaining $2,000,000 come from? –Sale of existing building? –Hospital? –State? –Capital Campaign? –HC Reform?

Capital Link Conventional Bank Loan Sources of Funds: Bank Loan…..$8,000,000 Other……….….$2,000,000 Total…………….$10,000,000 Annual Debt Service………..$ 562,032

Capital Link New Markets Tax Credits Investment that isnt repaid 20% of total project cost Finding a Community Development Entity (CDE) Application and awards 80 NMTC

Capital Link NMTC Hypothetical CHC Project Assumes $10 million Equity Investor CDE LLC Equity investment ~ $3.3 million Eligible CHC Fees & Reserves ~$1 million NMTC Fund LLC $11 million investment into CDE $10 million in loans Bank or TE Bond Debt A-1 Loan: $7.7 million B Loan: $2.3 million $7.7 million $5.15 million in tax credits (39% over 7 years)

Capital Link When Can NMTC Be Used Qualified census track Willing lender Investor With TE bonds or bank loan USDA

Capital Link Bank Loan: HRSA Guarantee and NMTC NMTC investment approximately 20% of project cost - $2,000,000 Bank loan for the balance - $8,000,000 interest only for 7 years Interest rate with HRSA LG – 6% No need for additional financing

Capital Link Bank Loan: HRSA LG and NMTC Sources of Funds: Bank Loan…..$8,000,000 NMTC….……….$2,000,000 Total…………….$10,000,000 Annual Debt Service………..$ 480,000

Capital Link USDA Usable with other options Population 20,000 or under Loan guarantee 90% Direct Loan 4.5% for 40 years Application Feasibility analysis 85 USDA

Capital Link USDA Direct Loan Structure Loan will be 80% of project Cost - $8,000,000. Roughly 4.5% interest rate with 40 year amortization. Where will the remaining $2,000,000 come from? –Sale of existing building? –Hospital? –State? –Capital Campaign? –FIP or CIP?

Capital Link USDA Direct Loan Sources of Funds: USDA Loan…..$8,000,000 Other…………….$2,000,000 Total…………….$10,000,000 Annual Debt Service………..$ 431,580

Capital Link Tax Exempt Bonds With other options NMTC Taxable Bonds State issuing authority LOC from bank Private Purchase Interest rate Bond Pool 88 TE Bonds

Capital Link Tax Exempt Bonds and NMTC NMTC investment approximately 20% of project cost - $2,000,000 TE Bonds for the balance - $8,000,000 interest only for 7 years Interest rate – 4.5% No need for additional financing

Capital Link Bank Loan: HRSA LG and NMTC Sources of Funds: TE Bonds..…..$8,000,000 NMTC….……….$2,000,000 Total…………….$10,000,000 Annual Debt Service………..$ 360,000

Capital Link Single Bond Issue CHC $38.5 million $7.7 mil. Pooled TE Bond Issue

Capital Link Taxable Bonds With other options With TE Bonds NMTC Any Investment Banking firm Private Purchase (Non-profit Foundations) Program Related Investments (PRI) 92 Tax Bonds

Capital Link Taxable Bonds and NMTC NMTC investment approximately 20% of project cost - $2,000,000 Taxable Bonds for the balance - $8,000,000 interest only for 7 years Interest rate – 3.5% No need for additional financing

Capital Link How in the world can you get such a low interest rate? Use the HRSA LGP to provide a 100% federal guarantee Fund at least 20% of the project with NMTC or grants Have TE foundation provide the funds as a Program Related Investment.

Capital Link NMTC $2 million Single Purpose Entity $10 million Foundation $8 million CHC Project $10 million HRSA Guarantee 80% of $10 million Loan or Bond Loan Guarantee 100% of $8 million Forgivable Loan Loan Federally Guaranteed Capital Finance Structure for CHCs

Capital Link Taxable Bonds: HRSA LG and NMTC Sources of Funds: Tax Bonds....$8,000,000 NMTC….……….$2,000,000 Total…………….$10,000,000 Annual Debt Service………..$ 280,000

Capital Link Remember the Conventional Bank Loan? Sources of Funds: Bank Loan…..$8,000,000 Other……….….$2,000,000 Total…………….$10,000,000 Annual Debt Service………..$ 562,032

Capital Link How Can I Qualify Financially? 98

Capital Link Financial Benchmarks Profitability: Operating Margin Bottom Line Margin Growth Rates: Operating Revenue Growth Rate NPSR Growth Rate Grants and Contracts Growth Rate Operating Expense Growth Rate Liquidity: Current Ratio Days in Net Patient Receivables Days in All Receivables Days in Accounts Payable Days Cash on Hand Debt Capacity Ratios: Leverage Debt Service Coverage 99

Capital Link Operating Margin Change in Net Operating Assets Total Operating Revenue Measures Profitability The percentage of operating revenue that the health center retains as profit (or loses) from operations. Capital Links Recommended Benchmark Maintain Operating Margin at 1% to 3% or higher. The higher the margin, the stronger the financial performance. 100

Capital Link Bottom Line Margin Change in Net Assets Total Operating Revenue Measures Profitability The percentage of operating revenue that the health center retains as profit (or loses) from all business activities. Capital Links Recommended Benchmark Maintain Bottom Line Margin at 3% or higher. The higher the margin, the stronger the financial performance. 101

Capital Link Current Ratio Total Current Assets Total Current Liabilities Measures Liquidity How many times the health center can cover its current obligations (due within one year) with current resources. Capital Links Recommended Benchmark Maintain Current Ratio of 1.25:1 or higher 102

Capital Link Days in Net Patient Receivables Net Patient Accounts Receivable Net Patient Service Revenue/ 360 Days Measures Liquidity The average number of days it takes the health center to turn its patient receivables into cash Capital Links Recommended Benchmark Goal is to keep this ratio low! Maintain Net Patient Receivables under 65-to-75 days 103

Capital Link Days in All Accounts Receivable All Receivables Patient + Grant receivables + Net Assets Released from Restrictions/ 360 Days Measures Liquidity The average number of days it takes the health center to turn all its receivables into cash Capital Links Recommended Benchmark Goal is to keep this ratio low! Maintain All Receivables turn under 60 days 104

Capital Link Days in Accounts Payable Accounts Payable (Total Operating Expenses minus Salaries and Depreciation) / 360 Days Measures Liquidity The average number of days it takes the health center to pay its suppliers Capital Links Recommended Benchmark Goal is to keep this ratio low! Maintain Payables under 60 days 105

Capital Link Days Cash on Hand Cash + Short-Term Investments (Total Expenses - Depreciation)/360 Days Measures Liquidity How many days the health center can cover its daily operating expenses with its current level of cash and investments Capital Links Recommended Benchmark Maintain at least 30-to-45 Days Cash on Hand 106

Capital Link Leverage Ratio Total Liabilities Net Assets Measures Financial Condition and Risk Compares the amount of the health centers resources that are owed (to vendors, creditors, employees) to those that are internally financed from equity sources Capital Links Recommended Benchmark Maintain Leverage Ratio of under 3.0:1 107

Capital Link Debt Service Coverage Net Income + Depreciation + Interest Expense Principal Payment + Interest Expense Measures Ability to Repay Debt How may times the health center can cover its yearly debt principal and interest payments with cash generated from operations Capital Links Recommended Benchmark Maintain Debt Service Coverage Ratio of 1.25 or higher 108

Capital Link Next Steps Preliminary Feasibility Analysis Market Assessment? Space Planning? Comprehensive Financing Assistance. –7 year Financial Forecast –Obtaining financing –Structuring financing.

Capital Link Jerry Garcia (Grateful Dead) Speaking for All Of Us… Somebodys gotta do somethin; its just incredibly pathetic its gotta be us!

Capital Link Terry Glasscock Capital Link